A Lame Response to Predatory Loans

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The Consumer Financial Protection Bureau has been promising for more than a year to rein in the payday lending industry, whose business model relies on luring Americans into ruinously priced loans that can carry interest rates exceeding 400 percent. The proposal that the agency unveiled Thursday represents a down payment on that promise. But the final rule — expected next year — will need stronger, more explicit consumer protections for the new regulatory system to be effective.

The industry says it provides a convenient option for consumers, who can get a quick loan and repay it on their next payday, typically in two weeks. The bureau discredited that claim two years ago in a striking study of more than 12 million loans issued in more than two dozen states. Only 15 percent of the borrowers could raise the money necessary to repay the entire debt within 14 days without borrowing again. One in five of these borrowers defaulted at some point, which meant damaged credit and more fees. And nearly two-thirds of them renewed a loan — some more than 10 times — putting them on a path toward ruinous debt.

Most people ended up paying more in fees than the amount they borrowed. In other words, the system is expressly designed to bleed borrowers, who are typically struggling workers or people on fixed incomes who are just getting by.

When the bureau announced its intent to regulate payday lenders last year, it said that it was considering several safety measures, the most important of which would limit monthly payments to no more than 5 percent of the borrower’s expected gross income for the same period. This would have the effect of spreading the costs and fees over the life of the loan, instead of having them come due all at once.

The bureau dropped the 5 percent measure from its current proposal — after protests by lenders and others — but should resurrect it in the final version. The proposal would require lenders to determine whether borrowers can repay their loans, but the requirement is dangerously vague and will need to be specified to be effective. It also puts some limits on when a lender can roll over a loan and on how many loans a person can be given in quick succession.

The Pew Charitable Trusts’ small-dollar loans project is especially critical of the proposal. According to its analysis, the new rules would still allow lenders to make high-interest, fee-laden loans — and give a green light to these peddlers of ruin all over the country. The goals for the final rules should be to keep payments affordable and give borrowers enough time to pay their loans.

That would constitute a dramatic improvement over the status quo. Such a system would acknowledge the needs of millions of people who lack access to banks and traditional consumer credit, while rejecting a system that bleeds them to death financially for taking out a relatively small loan.

The best solution would be for Congress to give the public the same protection from predatory lending that members of the military received under the Military Lending Act of 2007. The rules created under that law made it illegal for lenders to charge more than 36 percent for payday loans, vehicle title loans, installment loans and other forms of credit. (That rate is still quite high.)